Wednesday, April 18, 2012

The Wall Street Journal's silly , inaccurate story about Vodafone's problem with a retroactive tax proposal

There should not be much doubt in the minds of serious readers anywhere in the world that publications like The Wall Street Journal and The Economist can pretend to be super-objective and not succeed in hiding their abominable prejudices. The prejudices would have been mere prejudices if they had not pretended otherwise.

Here goes the exact part of the inaccurate reporting of this reportedly reputed business paper of the western world. Going with the headline, "Vodafone hits back at India Over Retroactive Tax" and written by Lilly Vitorovich in London and Amol Sharma in New Delhi, the relevant inaccurate part reads: "India last month proposed legislation that would allow the government to
tax transactions dating to 1962 in which two foreign firms exchange an
Indian asset."

No doubt that India's business reporters screamed hoarse that this was an unfair proposal and it is irrational and punitive to tax deals going all the way back to 1962. Of course, they did not pause to check whether that was the case. When finance minister Pranab Mukherjee had an interaction with industry bodies a few days after he presented the Budget, India's HSBC country chief Naina Lal Kidwai asked in a rather tentative tone, hedging her questions with a self-deprecatory aside of this being a possible storm in a tea-cup, asked whether it was not counter-productive in the sense that it would be a disincentive to foreign direct investment (FDI) into the country, Mukherjee said that India cannot be a tax haven, and asked finance secretary Gujral to explain the matter. Gujral patiently pointed out that according to the Income-Tax Act of 1961, any new amendment would only have retrospective affect for deals done during the previous six years, and that it does not mean that it will reach back to 1962 since when the law had been in action. It can be argued that even the six year retrospective affect is unreasonable and it could be maintained as a valid legal argument. But the stupid newspaper and many others like it want to paint the Indian government, and any government for that matter, as completely moronic. There is much merit in that presumption but there are enough times when it turned out to be wrong and even false, and those making that kind of an assumption and hurling that kind of an accusation look utterly dishonest and foolish.

This pertains to the prejudiced reporting of the so-called market-friendly and market-oriented newspaper reports. There is now need to look at these under an India-Netherlands bilateral investment treaty. If there is a provision in it that allows foreign companies to be free of tax obligations of the deals they do with other international prayers in a third country. In this instance, the British company Vodafone through its subsidiary had purchased the stake of a Hong Kong company, Hutchison Whampoa Ltd.'s business venture in India through a transaction in Cayman Islands, a known tax haven.

The Indian finance secretary had explained that Vodafone nor Hutchison paid tax in Cayman Islands, nor in United Kingdom nor in Hong Kong. Had they done so, they could have pleaded that it is unfair to be taxed twice for the same transaction. But that would required double taxation avoidance agreements between India and Britain and between India and Cayman Islands. Vodafone does not want to pay tax anywhere. The Indian officials explained that this was not a punitive measure against Vodafone.

He had also pointed out Lal that FDI does not come into India on the temptation that there is zero tax but because there are profits to be made. Investments look for profits and not for 'no tax' provisions. If there are losses to be made on an investment, then the zero tax provision is no incentive at all.

Vodafone has every right to fight every inch of the way to duck the payment of the capital gains tax, and look for help in international treaties and commitments and also look for loopholes in law. They can challenge this in every court of law. But those reporting it should refrain from arguing the case for Vodafone. The company can engage cunning corporate and tax lawyers and pay them handsomely. The news reports can restrict themselves to giving the information from both sides as fairly as possible. To take up cudgels on behalf of Vodafone against the Indian government would not prove the free market credentials of the newspaper but could raise the suspicion that behind the veneer of objectivity is a western, European and possibly even racial prejudice against an Asian country.

(There was a mistake in the report which identified Vodafone as a Dutch company. It has been corrected. Vodafone is a British company.)